How to Invest in Mutual Funds in a falling market

Why must you invest in a falling market?

Imagine a smartphone you really like that you were considering buying, now imagine its price has fallen by 15-20%.

Nothing has changed except for the price, would you not buy just because the price has fallen?

Of course not!

The same is true for investing in a falling market, why would you not invest in a falling market when you have the opportunity to accumulate more units at a lower price?

This applies only if the fundamentals of your investments remain the same, it is only natural for your investments to also see a dip if the broader market is also going through a fall.

You should also be careful to not try to time the market and instead stagger your investments.

What to do Before Investing

Have an Emergency fund

Have an emergency fund which ideally covers 12 months’ worth of expenses, this should be helpful in case of a job loss or any other financial emergency.

You should only invest once your non-discretionary expenses are taken care of.

Have Life/Term and Health Insurance

If you have financial dependents then make sure you have a term insurance as well as health insurance.

Diversify Your Assets

Ensure that your equity mutual funds are not your only source of investment.

Besides investing in equity mutual funds you should have savings beyond your emergency fund in other asset classes like a fixed deposit, gold, debt, etc.

Doing so would make you feel less nervous regarding the volatility of the equity markets.

Click Here to read why you must increase your SIPs annually

How to Invest

Just Start

The best time to invest was yesterday, the second best is now.

The same applies for planting a tree as well.

Irrespective of the amount, just begin because even a minor delay can cause a major setback.

Do not be blinded by the myth that equity investing requires a large sum.

Invest Strategically

You need not invest your entire amount in one go.

There are three ways to go about it:

Lumpsum
SIP
STP

If you’re planning on making a lumpsum investment then make sure you do not invest the entire amount in one go and instead only invest a portion leaving the rest for either SIP or STP or maybe even both.

A SIP helps with averaging your investments, you need not worry about timing the market.

A STP can help in a falling market since no one can predict the highs and lows, like a sip, it too helps in averaging your investments.

Have a Long-Term horizon

If you do not have a long term horizon then stay away from equity investing, the same logic applies in case you need the amount within five years.

The longer you wait, the lesser your chances of making losses and higher your chances of making decent returns.

Markets do not work linearly, they do not remain stagnant forever too so the current situation is not final.

Patience as a virtue will always be worth in gold no matter the walk of life.

Click Here to read How to invest in mutual funds as a first time investor

How not to invest

Timing the market

You cannot time the market, no one has ever been able to do so and most likely no one ever will.

You cannot predict how much further the markets will fall or rise, so attempting to predict is a futile exercise.

During a market correction, irrespective of how minor or major it is, the best investment strategy would be to invest in a staggered manner.

This could be done either via periodic lumpsum investments or a systematic investment plan (STP), either of the two would help you out in averaging your investments.

Ideally a STP plan makes more sense.

Ignoring your Risk Profile

Investors often over-estimate their ability to manage negative returns and their ability to hold their investments in a falling market.

This can be testified by the number of SIP stoppages and redemption count during a falling market.

Do not be swayed by the falling mid & small cap indices and invest in them assuming an opportunity since no one knows how further they can fall.

Your risk profile has nothing to do with the current market conditions, if your risk profile is not suited for a small cap fund then you should stay away from them irrespective of the market conditions.

Not Diversifying Correctly

During a falling market we often hear statements like ‘’certain pockets are over- valued’’ or ‘’large caps provide safe sanctuary at present.’’

Here’s the thing though, your ability or willingness to invest in a particular fund should not be influenced by how the market is behaving as that’s not in your hands anyway.

If say your risk profile does not mandate the need for a large cap fund then investing in one merely due to the present market commentary means you end up investing in something you should not have.

You also end up over- diversifying since your other equity funds most likely also have some exposure to large cap stocks.

The same applies if you’re under diversified.

Equity Investing is Not Linear

Date	Closing
01/01/2010	16,357
01/12/2011	15,454
01/05/2012	16,218
01/12/2015	26,117

The Sensex grew around 10,000 points from 1^st January 2010 to 1^st December 2015 but the growth was never linear.

It had its fair share of downs too which can be inferred by its closing on 1^st December 2011 and 1^st May 2012.

It is here where you need your faith the most and to be able to continue with your regular investments.

It was easier to invest on 1^st January 2010 & 1^st December 2015 than it was 1^st December 2011 & 1^st May 2012.

It is easier to have faith when you do not need any than to have it when you need it the most.

It is in human nature to predict the future in line with the present.

During an economic crisis or war humans are pessimistic about the future whereas a recently rewarded lottery winner is more optimistic.

We expect things to be in the future exactly as they are now, this theory only works in extreme cases though.

A similar case can be made of the Sensex for the period from 1^st January 2015 to 1^st December 2020 too.

Date	Closing
01/01/2015	29,182
01/05/2016	26,667
01/04/2017	29,918
01/12/2020	47,751

Money is earned but wealth is built and anything worthwhile will take its sweet time.

Short term market movements are unpredictable but in the long run the law of averages prevails.

Despite various short term fluctuations in the market, the Sensex has still achieved a 14% return in the past decade.

It is only natural to be doubtful and even experience notional losses during such periods but a logical approach devoid of any emotional impulses will ensure your notional losses do not turn into actual losses.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.

Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing